Investors starting out with a reasonable amount of capital to invest (say, $30,000 or so) have options to think through. Looking to put this capital to work in one asset class alone may be a mistake, considering the well-known benefits diversification can provide over the long term.
Indeed, finding the optimal risk-adjusted returns for one’s personal portfolio is difficult. Every investor has their own unique risk appetite, cash needs in retirement, and goals. Some may require higher growth rates to live the life they envision for themselves in a few decades’ time. Others may require greater stability, seeking a more peaceful and muted retirement.
We’re all different, which is what makes the investing journey personal and interesting. But for me personally, here’s how I’m looking at investing in this current environment, and where I’d consider putting my next $30,000 to work.
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Fixed income is starting to look attractive
From a personal investing perspective, I’ve been increasing my allocation toward bonds. Actually, I’ve been doing so in a substantial way for years.
Bonds, annuities, and other fixed-income securities are often viewed as assets that only investors on the older end of the age spectrum should consider. I’m not going to consider annuities anytime soon (though I think they can be part of a retirement strategy for many seniors). But in terms of bonds, and specifically U.S. Treasurys, I’ve been loading up of late.
Why?
Well, I’m of the view that the Federal Reserve is likely to follow the Bank of Canada, European Central Bank, and other major central banks in cutting interest rates. But for now, yields on government debt in the U.S. remain high, a reality I don’t expect will be able to continue much longer.
Similar to many governments around the world with heavy debt loads, interest rates in the 4-5% range aren’t sustainable from a budget perspective. These yields will have to be forced down, one way or another (recession or forced lower). In either case, I think investors owning such debt can benefit in what could be a vicious cutting cycle heading our way.
I’m largely on an island with this view, but I stand by it. Bonds could outperform equities for a significant portion of the next decade, particularly if valuations come in as many experts think is likely.
Dividend stocks another great place to look
If you hold a similar view to mine that interest rates are likely to come down, finding top-tier blue-chip dividend stocks such as Fortis (TSX:FTS) that have raised their dividends for decades each and every year, but also have rock-solid balance sheets, similar upside in a declining rate environment can be had.
I’ve touted a number of top Canadian dividend stocks I think investors should consider in previous pieces that I’d invite readers to parse through.
In essence, to create monthly income streams from such stocks, I’d argue that picking companies with various quarter-end dates for their dividend payments is the way to go. In a similar way to creating a bond ladder (in the example above), investors can create their own monthly income streams without being beholden to companies that opt to pay their dividends monthly.
